IDEAS home Printed from https://ideas.repec.org/p/unp/wpaper/201803.html
   My bibliography  Save this paper

Fiscal Constraints in the Financial System Stability Framework for Indonesian Data

Author

Listed:
  • Kindy R. Sjahrir

    (Fiscal Policy Office, Ministry of Finance. Republic of Indonesia)

Abstract

A number of macroeconomic episodes such as the 2018 global financial crisis, the tantrum taper for 2013-2015 show that financial system stability is closely related to the real economic sector, monetary policy and public finance. The analysis of dynamic general equilibrium as a microeconomic characteristic of New Keynesian macroeconomics makes real cohesion of fiscal, monetary, financial and business cycles complex, ambiguous and complex due to the many factors that work in different directions. Literature studies show that until now there has been no consensus among mainstream economists about the criteria or standard definition of fiscal sustainability within the framework of financial system stability. This study aims to fill the gap for Indonesian quarterly data from 2005 to 2017. The research premise that fiscal sustainability is an important factor in financial stability, for Indonesian data, especially through the transmission of fiscal imbalances and the government debt crisis. The reverse effect of the shock of monetary imbalance on the fiscal crisis is the second research question in this study. The literature suggests that the growing interdependence between fiscal policy and the financial sector leads to strengthening the two-way relationship between fiscal sustainability and financial stability. Fiscal constraints in relation to financial system stability for Indonesian data are reformulated as applied economic analysis to explain (1) indicators of fiscal sustainability in Indonesia; (2) secure intertemporal dynamic limits on debt for fiscal solvency; and (3) explain fiscal transmission to the financial system and the opposite of solvent fiscal financing operations. For emerging market countries such as Indonesia, with financial markets still developing without the complications of derivative financial markets and expanding bonds between the central and regional governments - presumably inter temporal budgetary constraints can be an indication of the main criteria for fiscal sustainability. Adopting the concept of Bagnai, Alberto (2004) and Burnside, Craig (2005) conception of the transmission of fiscal sustainability and the financial system - including monetary in this study stems from the definition of twin deficits in the national accounts. Analysis of fiscal sustainability from debt solvency and its relationship vis-à-vis with the financial system is carried out through structural vector autoregression analysis of the dynamics of three research questions for endogenous public debt to the fiscal stance and primary fiscal balance. The main references to this approach are Favero and Giavazzi (2007, 2009) to analyze the effect of primary equilibrium on GDP growth using the narrative of Romer and Romer (2010) and the structure of Blanchard and Perotti (2002). Empirical studies on this working paper show that (1) the shock of fiscal risk to the financial system for Indonesia's data now is mutually reinforcing (empirical studies on this working paper show that fiscal risk from financial system risk with current Indonesian data is not mutually reinforcing), and (2) shock from the financial system does not have a permanent impact on the primary balance and debt-to-gdp ratio. Significant contagion potential from two-way feedback on fiscal risk and financial system risk with current Indonesian data, shock from primary balance and debt-to-gdp ratio have a permanent impact on loan interest rates, and the temporary impact on inflation and GDP growth. The results of the empirical analysis of the SVAR model of this study indicate that it is important to be able to conduct good supervision and governance over the development of primary balance and periodic debt-to-GDP ratio for financial system stability. Both indicators provide a portrait of fiscal balance for a certain period. While the transmission of fiscal sustainability to the real business, financial and monetary cycles can be observed from indicators of liquidity, solvency and fiscal sustainability. The effect of primary balance and debt-to-GDP ratio is derived from the identity of the flow of funds with a two-way feedback loop between the financial sector (banking and monetary) and the fiscal stance.

Suggested Citation

  • Kindy R. Sjahrir, 2018. "Fiscal Constraints in the Financial System Stability Framework for Indonesian Data," Working Papers in Economics and Development Studies (WoPEDS) 201803, Department of Economics, Padjadjaran University, revised Dec 2018.
    • Handle: RePEc:unp:wpaper:201803
    as

    Download full text from publisher

    File URL: http://ceds.feb.unpad.ac.id/wopeds/201803.pdf
    File Function: First version, 2018
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Nathalie Girouard & Christophe André, 2005. "Measuring Cyclically-adjusted Budget Balances for OECD Countries," OECD Economics Department Working Papers 434, OECD Publishing.
    2. Corsetti, Giancarlo & Kuester, Keith & Meier, André & Müller, Gernot J., 2014. "Sovereign risk and belief-driven fluctuations in the euro area," Journal of Monetary Economics, Elsevier, vol. 61(C), pages 53-73.
    3. Jeffrey A. Frankel & Shang-Jin Wei, 2004. "Managing Macroeconomic Crises," NBER Working Papers 10907, National Bureau of Economic Research, Inc.
    4. Atish R. Ghosh & Jun I. Kim & Enrique G. Mendoza & Jonathan D. Ostry & Mahvash S. Qureshi, 2013. "Fiscal Fatigue, Fiscal Space and Debt Sustainability in Advanced Economies," Economic Journal, Royal Economic Society, vol. 0, pages 4-30, February.
    5. Mr. Thomas Baunsgaard, 2003. "Fiscal Policy in Nigeria: Any Role for Rules?," IMF Working Papers 2003/155, International Monetary Fund.
    6. Ritu Anand & Sweder van Wijnbergen, 1988. "Inflation, External Debt and Financial Sector Reform: A Quantitative Approach To Consistent Fiscal Policy With An Application to Turkey," NBER Working Papers 2731, National Bureau of Economic Research, Inc.
    7. Mr. Joseph Ntamatungiro, 2004. "Fiscal Sustainability in Heavily Indebted Countries Dependenton Nonrenewable Resources: The Case of Gabon," IMF Working Papers 2004/030, International Monetary Fund.
    8. Giancarlo Corsetti & Luca Dedola, 2016. "The Mystery of the Printing Press: Monetary Policy and Self-Fulfilling Debt Crises," Journal of the European Economic Association, European Economic Association, vol. 14(6), pages 1329-1371.
    9. Francesco Caprioli & Sandro Momigliano, 2011. "The effects of fiscal shocks with debt-stabilizing budgetary policies in Italy," Temi di discussione (Economic working papers) 839, Bank of Italy, Economic Research and International Relations Area.
    10. Anand, Ritu & van Wijnbergen, Sweder, 1989. "Inflation and the Financing of Government Expenditure: An Introductory Analysis with an Application to Turkey," The World Bank Economic Review, World Bank, vol. 3(1), pages 17-38, January.
    11. Mr. Jonathan David Ostry & Mr. Abdul d Abiad, 2005. "Primary Surpluses and sustainable Debt Levels in Emerging Market Countries," IMF Policy Discussion Papers 2005/006, International Monetary Fund.
    12. Giancarlo Corsetti & Luca Dedola, 2012. "The "Mystery of the Printing Press" Monetary Policy and Self-fulfilling Debt Crises," Discussion Papers 1424, Centre for Macroeconomics (CFM), revised Aug 2014.
    13. Mr. Marcello M. Estevão & Issouf Samaké, 2013. "The Economic Effects of Fiscal Consolidation with Debt Feedback," IMF Working Papers 2013/136, International Monetary Fund.
    14. Hana Polackova Brixi & Allen Schick, 2002. "Government at Risk : Contingent Liabilities and Fiscal Risk," World Bank Publications - Books, The World Bank Group, number 15233.
    15. Mr. Peter S. Heller, 2005. "Understanding Fiscal Space," IMF Policy Discussion Papers 2005/004, International Monetary Fund.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Bandiera, Luca & Budina, Nina & Klijn, Michel & van Wijnbergen, Sweder, 2007. "The"how to"of fiscal sustainability : a technical manual for using the fiscal sustainability tool," Policy Research Working Paper Series 4170, The World Bank.
    2. Budina, Nina & van Wijnbergen, Sweder, 2007. "Quantitative approaches to fiscal sustainability analysis : a new World Bank tool applied to Turkey," Policy Research Working Paper Series 4169, The World Bank.
    3. Pablo Anaya & Alex Pienkowski, 2015. "What Really Drives Public Debt: A Holistic Approach," IMF Working Papers 2015/137, International Monetary Fund.
    4. Ostry, Jonathan D. & Debrun, Xavier & Willems, Tim & Wyplosz, Charles, 2019. "Public Debt Sustainability," CEPR Discussion Papers 14010, C.E.P.R. Discussion Papers.
    5. Corsetti, Giancarlo & Dedola, Luca & Jarociński, Marek & Maćkowiak, Bartosz & Schmidt, Sebastian, 2019. "Macroeconomic stabilization, monetary-fiscal interactions, and Europe's monetary union," European Journal of Political Economy, Elsevier, vol. 57(C), pages 22-33.
    6. Corsetti, Giancarlo & Maeng, Seung Hyun, 2020. "Debt Crises, Fast and Slow," CEPR Discussion Papers 14868, C.E.P.R. Discussion Papers.
    7. Battistini, Niccolò & Callegari, Giovanni & Zavalloni, Luca, 2019. "Dynamic fiscal limits and monetary-fiscal policy interactions," Working Paper Series 2268, European Central Bank.
    8. Candelon, Bertrand & Luisi, Angelo & Roccazzella, Francesco, 2022. "Fragmentation in the European Monetary Union: Is it really over?," Journal of International Money and Finance, Elsevier, vol. 122(C).
    9. Mats Persson, 2016. "Debts, Deficits and Multiple Equilibria: A New Role for ECB Monetary Policy?," CESifo Forum, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 17(01), pages 63-71, April.
    10. Occhino, Filippo, 2017. "The 2012 eurozone crisis and the ECB’s OMT program: A debt-overhang banking and sovereign crisis interpretation," European Economic Review, Elsevier, vol. 100(C), pages 337-363.
    11. Eijffinger, Sylvester C.W. & Kobielarz, Michał L. & Uras, Burak R., 2018. "Sovereign default, exit and contagion in a monetary union," Journal of International Economics, Elsevier, vol. 113(C), pages 1-19.
    12. Eijffinger, S.C.W. & Kobielarz, M.L. & Uras, R.B., 2015. "Sovereign Debt, Bail-Outs and Contagion in a Monetary Union," Other publications TiSEM 3a1338db-3d69-448b-92c0-8, Tilburg University, School of Economics and Management.
    13. Philippe Bacchetta & Elena Perazzi & Eric van Wincoop, 2015. "Self-Fulfilling Debt Crises: Can Monetary Policy Really Help?," Cahiers de Recherches Economiques du Département d'économie 15.06, Université de Lausanne, Faculté des HEC, Département d’économie.
    14. Delorme, Francois, 2014. "Viabilité et vulnérabilité des finances publiques du Québec à moyen terme : une proposition d’un cadre d’analyse et une évaluation [Sustainability and vulnerability of Québec's public finances in t," MPRA Paper 85050, University Library of Munich, Germany.
    15. Ms. Anja Baum & Andrew Hodge & Ms. Aiko Mineshima & Ms. Marialuz Moreno Badia & Rene Tapsoba, 2017. "Can They Do It All? Fiscal Space in Low-Income Countries," IMF Working Papers 2017/110, International Monetary Fund.
    16. Corsetti, Giancarlo & Kuester, Keith & Meier, André & Müller, Gernot J., 2014. "Sovereign risk and belief-driven fluctuations in the euro area," Journal of Monetary Economics, Elsevier, vol. 61(C), pages 53-73.
    17. Claudio Borio & Marc Farag & Fabrizio Zampolli, 2023. "Tackling the fiscal policy-financial stability nexus," BIS Working Papers 1090, Bank for International Settlements.
    18. Bacchetta, Philippe & Perazzi, Elena & van Wincoop, Eric, 2018. "Self-fulfilling debt crises: What can monetary policy do?," Journal of International Economics, Elsevier, vol. 110(C), pages 119-134.
    19. Adham Jaber, 2022. "Improving the estimates of fiscal space," French Stata Users' Group Meetings 2022 16, Stata Users Group.
    20. Mackowiak, Bartosz & Corsetti, Giancarlo & Dedola, Luca & Schmidt, Sebastian & Jarocinski, Marek, 2017. "Macroeconomic Stabilization, Monetary-Fiscal Interactions, and Europe’s Monetary Union," CEPR Discussion Papers 12371, C.E.P.R. Discussion Papers.

    More about this item

    Keywords

    Structural Autoregressive; Fiscal Constraints in Financial System Stability Framework; Indonesian Data; Financial Sector Stability and Fiscal Policy;
    All these keywords.

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:unp:wpaper:201803. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Arief Anshory Yusuf (email available below). General contact details of provider: https://edirc.repec.org/data/lppadid.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.